Five Latin America Stocks With Big Turnaround Potential

By Dimitra DeFotis

Reuters

Graffiti that reads “No to the debt payment” in Buenos Aires, Argentina.

Latin American stocks have underperformed emerging market equities by 16% since their peak in April 2011.

That prompted Morgan Stanley to screen for a handful of “self-help” stocks in Latin America that it likes – names that screened well for big turnaround potential based on trends in valuation, margins and profitability.

All the above stocks on average are trading at 17.1x forward earnings (or -0.7 S.D. vs their 4-year historical average), and our fundamental analysts expect an average increase of 3.3 percentage points in their return-on-equity over the next two years (twice as much as for our overall sample).

The methodology excluded names that Morgan Stanley rates Underweight, and on profitability, the following applied:

“stocks with low return-on-equity vs. their history suggest the existence of ample room for management to reshape the company’s operations and/or capital structure to increase returns in excess of its cost of capital. … in our analysis of the 164 Latin American companies covered by Morgan Stanley, we … tracked the change in average profitability between 2012-14e and 2015e-16e, and then calculated the delta as a proxy for expected turnaround (i.e., the bigger return-on-equity increase, the better for stock performance).”

Within the last 12 months, Morgan Stanley had an investment banking relationship with a number of companies on its list, and intends to seek investment banking services from many of them.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.